San Diego restaurant chain is looking at securitization to change its capital structure

San Diego’s Jack in the Box said Wednesday that it has dropped efforts to find a buyer and instead will look to recapitalize the company through a debt securitization.

The move comes after Jack in the Box began exploring strategic alternatives last November, including a possible sale, under pressure from activist investors.

The fast-food restaurant chain also is facing a backlash from some franchisees, who contend it has failed to provide enough marketing and other support for their businesses. A group that represents owners of the bulk of Jack in the Box’s franchise restaurants has called for Chief Executive Leonard Comma to step down, among other things.

In a statement, the company said it contacted “a broad range of potential strategic and financial buyers, both domestic and international.”

At the same time, it looked at a range of financing options including a new capital structure that included adding debt through the securitization.

Jack in the Box’s board of directors opted for the latter. It expects to replace its existing term loan and revolving credit line with the securitization, which essentially means refinancing the loans with marketable debt securities that are sold to investors.

Once it pays off existing loans, Jack in the Box intends to use some of the proceeds for the debt securitization to repurchase shares, which could boost earnings per share and its stock price, depending on future financial performance.

“With this evaluation behind us, we are dedicated to moving the Jack in the Box brand forward,” said David Goebel, lead director of the company’s board, in a statement. “The Board of Directors unanimously and wholeheartedly supports Chairman and Chief Executive Lenny Comma and the entire management team as we collectively pursue a strategic plan focused on value creation as a standalone company.”

Just how much additional debt the company might take on through the securitization remains unclear. In a statement, Jack in the Box said it is targeting a leverage ratio of about 5 times adjusted EBITDA — or earnings before interest, taxes, depreciation and amortization.

“They’re saying we are going to do a securitization that is going to free up funds for general corporate purposes and for the share buyback and the like,” said John Gordon of Pacific Management Consulting Group, a restaurant industry adviser. “That may or may not be enough to get the activists out of their tailpipe. It really doesn’t do anything to alter the fundamentals of the business.”

At the end of its 2018 fiscal year, the company’s debt ratio was four times adjusted earnings of about $264 million, said Lance Tucker, chief financial officer, in a February conference call with analysts.

Jack in the Box has forecast adjusted earnings of $265 million for the 2019 fiscal year ending in September but aims to boost adjusted earnings to about $300 million in coming years, said Gordon.

“It looks like they are moving from approximately $1.1 billion in debt to $1.5 billion in debt,” with the securitization, he said.

Jack in the Box has been talking about securitization for some time. On the February conference call, Tucker said the move allows the company to tap into low interest rates. He added that the leverage ratio of 5 times adjusted EBITDA would be less than the ratio of some of the company’s restaurant industry peers.

Jack in the Box also reported fiscal second quarter earnings on Wednesday after markets closed. Revenue came in at $216 million, compared with $210 million for the same quarter last year.

Earnings from continuing operations were $25.1 million, or 96 cents per share, compared with $25 million, or 85 cents per share, a year earlier.

The company’s shares ended trading Wednesday up 44 cents at $77.84 on the Nasdaq exchange